Thursday

Aug 2, 2018 at 3:27 PM

The Permian Basin is helping President Donald Trump make good on his rallying cry about U.S. energy independence.

But his decision to impose 25 percent tariffs on much of the world's steel comes at a time when foreign steel is flowing into Texas in massive quantities. Pipeline companies are spending billions of dollars in the next couple of years to keep the oil and natural gas flowing out of the Permian Basin, which is struggling with a severe transportation bottleneck.

Nationally, industry groups warned that tariffs could increase the cost of projects by tens of millions of dollars and threaten U.S. jobs. In Texas, there are few details about how much the tariffs will cost companies building this next wave of Permian Basin pipelines.

Plains All American Pipeline is currently building its $1.1 billion, 550-mile Cactus II pipeline in the Permian Basin. And the Houston-based company took the rare step of making the tariff costs public.

In written testimony to Congress this month, Willie Chiang, the company's chief operating officer and expected to be its next CEO, said U.S. companies weren't manufacturing steel to the specifications needed for Cactus II. So, the company has a contract with a Greek steel mill.

The Association of Oil Pipe Lines said in a written statement in March that pipeline steel is a "niche" market. "U.S. domestic steel producers largely exited the pipeline business because of its small market, higher costs, and lower margins, choosing to focus instead on higher volume products (steel for automobiles, appliances, etc)," according to the statement.

Chiang said the pipeline will go forward, but the tariff will act as a "punitive tax of approximately $40 million, yet the U.S. steel industry will receive no benefit." The pipeline is expected to have a capacity as high as 700,000 barrels per day.

That increased the project's cost by 3.6 percent, or about what an industry-funded study predicted last year.

"Critical infrastructure" and international steel orders placed before the tariffs should be exempt, Chiang told members of the U.S. House Ways and Means subcommittee on trade.

Seeking markets

The pipeline capacity shortage in the Permian Basin _ both crude oil and natural gas _ has been a major concern for much of this year. The geological formation, which covers parts of West Texas and eastern New Mexico, has grown into an oil production powerhouse that affects the global market.

Major Permian Basin producers have to explain now to investors how they are planning to get oil and natural gas out of the region, where it sells for a substantial discount due to the bottleneck.

Irving-based Pioneer Natural Resources said in a recent Securities and Exchange Commission filing that the company was received an average of $61.20 per barrel of oil in the second quarter of this year. Bloomberg pointed out that was nearly $7 lower than Nymex oil futures for that same quarter.

Concho Resources, now the largest unconventional driller in the Permian Basin, said in a filing this week that the company received an average of $60.98 per barrel in the second quarter.

The lack of pipeline capacity has made it harder for oil and natural gas to get out of the Permian and to other parts of the domestic market or to the Gulf Coast for processing or export. So buyers have been pay less than they would in other parts of the U.S.

Despite the national concern about tariffs, no major Permian Basin pipeline projects have cancelled due to the tariff. And even more could be on the way.

Kinder Morgan, Apache Corporation and a Blackstone Energy company announced last month their plans for the $2 billion Permian Highway Pipeline Project. If it goes forward, that would transport as much as 2 billion cubic feet of natural gas per day from the Permian Basin to the Texas Gulf Coast and Mexico.

And Exxon Mobil and Plains All American are looking into a joint venture for a crude oil pipeline with a capacity of 1 million barrels per day. That would connect the Permian Basin to Beaumont, where Exxon has a giant refinery.

Calculating the cost

Petroleum and pipeline industry groups commissioned a study last year estimating the increase cost if the steel pipes were 25 percent more expensive. That study figured that a typical oil pipeline (280 miles) would cost $76 million _ or about 3.1 percent _ more. A natural gas pipeline would cost about 3.3 percent more, according to the industry research.

The report, which warned of job loss due to tariffs, said that in recent year, 77 percent of steel used in pipeline pipes was imported.

Kinder Morgan's $1.75 billion Gulf Coast Express natural gas pipeline is using mostly U.S. steel, but some is foreign and subject to the tariff. The company has asked for an exclusion from the tariff. amd the request is pending at the U.S. Department of Commerce.

Melissa Ruiz, a Kinder Morgan spokeswoman, said it was premature to speculate on the cost to Gulf Coast Express. The pipeline is expected to transport natural gas from the Permian Basin to Agua Dulce, near Corpus Christi.

Trump's actions won't necessarily have a significant impact on every project.

"We are finding enough sources domestically and in exempted countries to supply the project and keep the bids competitive," he said via email. "We anticipate pipe acquisition times to be in line with our planned project schedule."

That $2 billion pipeline connecting the Permian Basin and Corpus Christi is expected to be completed by the end of the 2019. It could also be expanded to 1 million barrels, according to company officials.

Nuss said the tariffs hasn't changed Phillips 66's plans for future pipelines. But he said others could be affected.

"From an industry perspective, we're concerned about the announcement, and it could result in increased costs or possible delays or cancellations," Nuss said.

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